Tag: Industry Guide

When it comes to constructing cultivation, manufacturing, and retail facilities, cannabis entrepreneurs must adhere to a very specific set of requirements. Oftentimes, that means working with experts who know the ins and outs of what it takes to get a facility up and running the right way. 

From keeping your project on schedule to ensuring full compliance with sometimes-labyrinthine regulations, cannabis facility construction is not as straightforward as other commercial development. This guide to construction for cannabis cultivation, manufacturing, and retail facilities can help you best understand the challenges and solutions out there.

Key considerations for cannabis facility construction

A great deal of planning goes into the construction of a cannabis facility, regardless of which sector you plan to operate in. Understanding the key considerations to bear in mind before you select a site for your facility is critical to establishing a sensible business plan and timelines that are grounded in reality.

Andy Sack and Pete Hall of Palmer Construction Co. have years of experience in building out facilities for cannabis businesses. According to Sack and Hall, it’s best to break down the process into two stages: facility planning and design, and the construction itself.

Facility planning and design

Before you can actually start constructing your facility, you’ll need a site to build on, a concrete plan, and any required permits and licenses from your local, county, and state governments. Here are some of the key steps involved in this phase of the process, according to Sack and Hall. 

Site selection

When choosing a site for your cannabis facility, there are a few major considerations to bear in mind. These include whether local zoning ordinances allow for your intended use of the site, your proximity to residential neighborhoods, and whether the utilities companies can meet your needs for water and electricity. 

“We see a lot of cultivation applicants say they have a site readily available at an attractive price, but it turns out utility services are lacking,” Hall said. “Cultivators are huge consumers of electricity and almost no place has adequate power to support a grow — even the industrial areas you think would.”

Hall advised doing the upfront vetting work before acquiring a site to ensure that the utilities meet your needs. This is especially important for cultivators, which require immense amounts of electricity and water to support their grows. Retrofitting a site with additional power after the fact is expensive and time consuming, Sack said.

“Not only are there significant costs included with bringing in that additional power, but it’s usually a very lengthy project,” Sack said. “We see a lot of people tie the know on these sites and then find out later that it’ll be 24 to 36 months before they can get power there.”

Retail operations have very different considerations, of course, since they are catering to consumers rather than operating a B2B business like most cultivators and manufacturers. “From the dispensary and retail side, it’s much more about ensuring you’ll have the exposure you need,” Hall said. 

Choosing a site that is close enough to residential neighborhoods to get attention and traffic is important, but finding one that is far enough away to avoid upsetting residents who are not so cannabis-friendly can also be a benefit. Finding that happy medium can be a challenge for cannabis retail businesses, but is often worth the hunting in the early stages.

Facility design

Before you can go before your local land use boards to secure the permits you’ll need to begin construction, you need to show them a detailed facility design plan. That doesn’t just mean drawing up a floor plan and calling it a day, though, it also means planning for the internal mechanical systems that a facility needs, including HVAC systems, plumbing, electrical, and more.

“The mechanical systems are really key, especially to the success of a grower,” Hall said. “If they don’t have the right systems in place, we see a lot of problems with sizing, lack of humidity control, lack of cooling capacity, and those types of things.”

“Everyone is really concerned with having pretty facilities, but they need to be more focused on having functional facilities,” Sack added. “Making sure that the environment is dialed in is the most important thing; it’s better to have a good mechanical engineer than it is to have a good architect.”

Of course, before you can move forward on implementing your facility design at all, you need to present your plans to the relevant governing bodies to make sure they sign off.

Permit acquisition

Once your site is selected and your facility design plans are in place, it’s time to schedule a hearing with the local land use boards. This could include a zoning board and a planning board, or a unified land-use board depending on your local government’s structure. Regardless, these hearings dig into your plans on a detailed level and allow officials and members of the public the chance to comment about its potential impact on the community. 

Land-use boards have the right to request you make changes to your existing plans and reserve the right to deny your application, so it’s important you come prepared to meet their expectations. If possible, open a line of communication with the appropriate land-use board and officials during your site selection and facility design phases to learn as much as you can about their expectations ahead of time. That way, you can come to the hearing with as compliant a plan as possible to reduce the likelihood you’ll need to go back to the drawing board.

In addition to securing approval from the government, Hall said, it’s important to be sure that the landlord or lender involved in site acquisition are also aware you will be operating a cannabis business. 

“There are conditions that might’ve been placed on that site by a landlord, other tenants, or lenders that could prevent applicants from occupying the facility,” Hall said. “So, that’s part of the due diligence stage — all parties who have a say in putting a cannabis operation of any sort in the building should sign off that they accept it.”

Construction

Once you’ve acquired a site, developed a plan, received government approval, and secured the sign-off of all other stakeholders, you’re ready to enter the construction phase. But it’s not so simple as starting to build on the spot, especially in today’s climate with the supply chain issues plaguing every industry. More planning is needed to understand the scope and timeline of your project, which is certainly not going to be completed overnight.

Materials acquisition

Ensuring supplies come on time is essential for staying on track and hitting deadlines. This became an even more urgent issue in light of global supply chain delays triggered by the COVID-19 pandemic. For operators, this challenge meant serious delays on critical components, making it important to place orders in a strategic way. 

“It’s a real moving target,” Sack said. “Key components were extremely difficult to secure [during the COVID-19 related supply chain slowdowns]. Price protection is very difficult to provide. [In this case], there are certain systems you can’t promise to any type of operator for up to a year from the time you place an order.”

Whether faced with supply chain challenges or purchasing components when delivery is expected to be on time, planning ahead is crucial. Placing orders for major mechanical systems you’ll need in the final phase of construction during phase one, for example, is one way operators can hope to shorten the timeline to completion, Sack said.

“If you work with a good design team and a good construction team, they can help you identify the longest lead times and find ways to order packages of key equipment early to try and compress the schedule,” he said.

Security requirements

When establishing your facility, always keep in mind the security requirements mandated for cannabis operations and ensure you’re planning to implement the systems needed to monitor your facility in accordance with the law.

“We’ve had applicants who didn’t understand the security requirements and regulatory compliance,” Hall said. “It’s all really difficult to appreciate until you have been through the process once or twice.”

Hall recommended working with an experienced application consultant who can bring together knowledgeable contractors and designers to include security considerations from the beginning of the process. Once the facility is largely built out, it should already be suitable for a security company to easily implement the system you need and begin monitoring everything that happens on your site once operational.

Construction timeline

Construction occurs in phases, which can be planned with specific target dates in mind. However, it’s important for operators to remember that any number of things can cause delays, from late shipments of materials to inclement weather. Building in flexibility to the schedule and the business plan is highly recommended, Hall said. 

In some cases, he added, it’s possible to establish facilities in phases that allow businesses to begin limited operations while the remaining construction is performed. This enables businesses to begin realizing revenue even though their full facility has not been built out. In the cannabis industry, this is a popular approach, as it can be extremely capital-intensive to launch a cultivation, manufacturing, or retail facility. 

“There are often things that cause these projects to get delayed much longer than everybody wants,” Sack said. “Clients always want the construction done right away, but the truth is that’s just not possible, so they’re paying a lot of money with no cash flow coming in.

“If the local municipality and governing agency will allow it, though, we help them build out in stages so we can get one room online, then another room, so they can start growing,” he added. “A lot of places will allow that to happen and sign off on partial occupancy.”

Plan accordingly when it comes to cannabis facility construction

Building a facility is never an easy process, especially in the cannabis industry. Proper planning and design are a critical part of ensuring your business is able to open on time and start driving revenue in a way that makes sense for your business plan. Operators who are not familiar with construction are best served by partnering with an expert consultant and cannabis-experienced team of contractors, designers, attorneys, and professionals to make sure every aspect of their plan checks out. Otherwise, they could end up with massive delays, ballooning costs, and the possibility that their business never gets off the ground. 

If you’re looking to meet the experts and professionals who will be part of your team and help you make your business a success, look no further than the Cannabis World Congress & Business Exposition. At the CWCBExpo, industry leaders offer their insights and experiences alongside the best networking opportunities to meet the valuable partners that will help you realize success in the rapidly growing cannabis industry.

Although the cannabis industry remains federally illegal, both plant-touching and ancillary businesses still owe federal taxes. Unfortunately, unlike other businesses that benefit from certain deductions and credits that fall under Internal Revenue Code Section 280E, cannabis businesses like cultivators, processors, and dispensaries cannot take the same deductions. As a result, the tax burden on plant-touching cannabis businesses tends to be significantly higher than that of similar entities outside the cannabis space.

Anyone considering operating a plant-touching entity needs to be aware of Section 280E and what it means for their business come tax time. This guide explains the nuances of this law, its unusual origin story, and tips on how cannabis businesses can save as much as possible while remaining compliant with state and federal laws and regulations.

What is Section 280E of the Internal Revenue Code?

Section 280E is a provision in the IRS Internal Revenue Code that stipulates any merchant selling goods considered a Schedule I or Schedule II controlled substance under the Controlled Substances Act (CSA) is not eligible to file for any tax deductions or tax credits beyond the cost of goods sold (COGS).

“280E is just a basic paragraph that says if you’re involved in trafficking a controlled substance, you’re not allowed to take any deductions against your income,” said Dean Guske, CPA and founder of Guske & Company, Inc. “What it doesn’t say is that you’re allowed to take an adjustment for COGS.”

Where does Section 280E come from?

Section 280E came about in 1982 following an almost unbelievable case in which a drug dealer sued the federal government in civil court, a case known as Edmondson v. Commissioner.

In that case, Jeffrey Edmondson attempted to claim tax deductions for the year 1974 on “ordinary and necessary business expenses” associated with his criminal activity, including the cost of the drugs, his phone plan, and travel throughout the U.S.

At the time, there was no law on the books that said such deductions weren’t allowed, and so the court sided with Edmondson against the IRS, allowing him to deduct the expenses despite the fact that his activity was plainly against the law. 

After the ruling, Congress promptly established Section 280E to avoid allowing future deductions on the sale of illegal drugs. At the time, there was no way to understand that this would create a major obstacle to the growth of future legal cannabis businesses. 

How Section 280E affects cannabis businesses

Although cannabis is now legal for medical and adult use in dozens of states, it remains a Schedule I substance under the Controlled Substances Act (CSA). As a result, even state-compliant cannabis businesses must pay federal taxes in accordance with Section 280E.

According to Guske, a Cannabis World Congress & Business Exposition (CWCBExpo) speaker, determining what constitutes COGS is where things become tricky. In breaking down the cannabis businesses impacted by 280E, Guske said there are three main groups, each with different levels of exposure.

• Producers: Producers are cultivators that grow cannabis and flower for consumption or for processing. These producers have limited exposure under Section 280E, as much of their expenses can be considered COGS. These expenses include the cost of raw materials like seeds and nutrients, filtration and HVAC systems, energy consumption, and certain labor costs. 
• Processors: Processors are the manufacturers that turn raw cannabis flower into finished products, such as concentrates and extracts, edibles, capsules, and topicals. Similar to producers, manufacturers tend to have limited exposure under Section 280E, as much of their expenses are considered COGS, including capital investments in manufacturing equipment, certain labor costs, energy consumption, and facility acquisition or expansion.
• Retailers: Retailers, which include dispensaries, have the most exposure under Section 280E. That’s because the only expenses that can be considered COGS is the purchase of the products that will be sold in the retail environment. All the other costs producers and manufacturers can deduct, such as labor, energy consumption, and capital investments, don’t apply to retailers, since it doesn’t directly go to the purchase of product to sell.

Although the way Section 280E is applied for an individual business is complex, the core principle behind it is rather simple, said John Pellitteri, CPA, partner and cannabis and accounting services leader at GRASSI Advisors & Accountants.

“COGS encompasses a number of things, but at a high level it’s essentially all the costs you’re able to deduct,” he said.

How to minimize the impact of Section 280E

Generally speaking, cannabis businesses of all types will always owe far more than industries not subject to Section 280E. However, every dollar saved helps to strengthen a company’s bottom line.

Hire a qualified certified public accountant

The first thing every cannabis business should do is hire a CPA – but not just any CPA. It’s critical to hire someone with the expertise in cannabis and navigating Section 280E. Tax law is complicated in any industry, but that’s especially the case in cannabis. Beyond simply staying compliant, CPAs can help your cannabis business plan accordingly and save as much money as legally possible.

Incorporate your business strategically

Depending on how your business operates and what segment of the industry it is involved in, how you incorporate could affect your tax burden. Guske said an important part of his initial meetings with clients is to analyze the best way for them to incorporate to reduce their tax bill under the existing regulations. 

“You want to make sure you’re setting your business up for the long term, and that happens on a case by case basis,” he said.

Ask your CPA about IRS Code Section 471

There is a separate but related IRS Code known as Section 471 that allows producers and processors the ability to allocate some direct and indirect costs as COGS, Pellitteri said. While this is a useful way to increase the total COGS, thereby reducing gross income and the overall tax burden, it is unfortunately not available to retailers.

Keep meticulous records of financial accounting

Finally, it’s always wise to keep detailed records of every dollar spent and precisely what it was spent on. This can go a long way to showing the IRS that your cannabis business is doing its best to abide by the law. Even if you’ve made some mistakes in determining what is considered COGS and what isn’t, an audit won’t be the end of the world if you can demonstrate that you have best practices in place to be compliant.

“The companies that lose and have penalties are the people not paying attention, who made no effort to understand 280E and wrote off everything as COGS,” Pellitteri said. “The question isn’t if you get audited, it’s when, and the IRS will look favorably on you if you’ve made a good faith effort.”

Don’t gamble with Section 280E

While many cannabis entrepreneurs view its burden as unfair, Section 280E is the law. Partnering with an experienced CPA can help you strategically plan every aspect of your business so you can maximize savings when tax time comes around.

If you’re looking to network with the best cannabis CPAs and financial professionals, start a business in the cannabis industry, or just want to get a sense of what’s happening in the space, join us at the next CWCBExpo cannabis trade show, where the leaders of the legal cannabis industry gather.

The cannabis industry is one of the fastest-growing industries in the U.S., eclipsing $20 billion in market value in 2020 and projected to reach $197.74 billion by the end of 2028, according to Fortune Business Insights. All that money needs to go somewhere, but unlike other industries, a cannabis business can’t just walk into a conventional financial institution and open a bank account.

As federal prohibition continues and the cannabis cash piles up in legal states where cannabis businesses can thrive, entrepreneurs have limited options when it comes to finding a place to store it and access other essential financial services. If you’ve experienced difficulty securing or keeping your business’s bank account open, don’t fret! While it might be difficult to find a bank that’s willing to openly work with cannabis businesses, it’s not impossible.

This guide breaks down the ins and outs of cannabis banking, why it’s so hard to find a financial institution to work with, and the tips you need to know to find the right bank for your cannabis business.

What are the main issues in cannabis banking?

If you ask people involved in the cannabis industry why banking is so hard to secure, most will tell you it’s due to federal prohibition. The refrain typically goes that because cannabis is federally illegal, banks stand to lose their FDIC status and federal charter if they work with cannabis businesses. Worse yet, some claim, bankers may even find themselves criminally liable for money laundering as a result of banking the cannabis industry.

None of this conventional wisdom is true. Although the federal prohibition is one factor that has led to restricted banking opportunities, it does not tell the whole story. In fact, banking legal cannabis businesses that operate in compliance with their local and state laws is already legal at the federal level.

This is because the Financial Crimes Enforcement Network (FinCEN) and other federal agencies responsible for regulating financial institutions – such as the Federal Depository Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) – have all made it clear that banking cannabis businesses is much the same as banking other highly regulated industries.

Banks that choose to work with cannabis businesses are required to closely monitor all funds in accordance with current anti-money laundering (AML) rules and regulations. This means instituting robust Know Your Customer (KYC) policies and processes, as well as meticulously documenting every deposit and withdrawal the business makes.

It’s not federal prohibition – it’s stigma and compliance costs

The rules for bankers to work with cannabis businesses in a federally compliant manner are clear. So, why don’t more banks take advantage of the massive market opportunity facing the cannabis industry?

The answer, as is so often the case, is that cannabis remains a stigmatized industry marred by nearly a century of disinformation campaigns and widespread ignorance. As a result, many bankers are afraid to work with cannabis businesses, either due to personal misgivings or fear of reprisal within their own professional or social networks.

“The single most important understanding regarding the cannabis industry’s access to banking and related financial services is that there has been no meaningful federal restriction on cannabis banking since at least 2014, and probably before then,” said Nathaniel Gurien, founder and CEO of Fincann, a cannabis banking network and past CWCBE exhibitor. “The true nub of the problem is the individual banks’ own reluctance to support what they feel is a shady and disreputable industry.”

Additionally, adhering to the federal rules related to banking a highly regulated industry can be costly. Banks are required to set up additional monitoring and, generally, must assign one person to closely manage each cannabis account personally. Moreover, they must periodically file suspicious activity reports (SARs) as required under the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual.

All this demands time, resources, and money from the bank – if they do not already have the infrastructure in place to meet these requirements, they may simply choose to avoid banking any highly regulated industry, cannabis included.

Other financial products impacted by cannabis banking restrictions

This stigma against cannabis and the compliance costs to financial institutions doesn’t just impact banking either, but all financial services. These include:

• Lending: Like all growing businesses, cannabis companies require capital to expand. One major way most businesses acquire additional capital is to seek out a loan or line of credit. Unfortunately, due to the reluctance of many banks to work with cannabis businesses, this access to capital is almost completely shut off for most entrepreneurs in the industry.
• Payroll: It can also be difficult for cannabis businesses to access services intended to help companies pay their employees. Banks often extend payroll processing and bill pay services, but many won’t do so for cannabis businesses – even if they’re willing to bank them. This means cannabis entrepreneurs often have to resort to paying employees in cash or by mailing checks, both of which are not ideal or efficient options.
• Merchant processing: Merchant processing services enable businesses to accept credit cards. Unfortunately, most cannabis businesses remain unable to do so because of restrictions imposed by major credit card networks like MasterCard or Visa.One workaround has been the “cashless ATM” in dispensaries, which customers use to “withdraw” an amount that covers their purchase, plus a fee, then receives the change in cash. For example, if someone purchases $91 in cannabis products, they “withdraw” $100 at checkout used to pay for the product and receive $9 in change. The transaction appears as an ATM withdrawal to the bank, but it is not.In December 2021, Visa announced its intention to crack down on the use of the cashless ATMs, issuing a stern warning to operators who do so.

What about hemp banking?

Perhaps the silver lining in cannabis industry finance is hemp banking. Industrial hemp, legally defined as Cannabis sativa L. containing less than 0.3% THC, was federally legalized for domestic cultivation, processing, and distribution with the signing of the 2018 Farm Bill. Now federally legalized, hemp could be treated like any other agricultural crop, both in the eyes of the law and bankers. Just as a corn farmer would be able to access a checking account, secure a loan, or accept credit card transactions, so too would hemp farmers and manufacturers.

What about CBD banking?

Unfortunately, even the 2018 Farm Bill didn’t make things easier on hemp-derived CBD businesses. Although industrial hemp – the leaves, stalks, and branches of the cannabis plant – is federally legal and easily banked, CBD is a different story.

The 2018 Farm Bill removed the regulation of hemp from the purview of the U.S. Drug Enforcement Agency (DEA) and divvied it up between two agencies. The U.S. Department of Agriculture, in cooperation with state agencies, would be responsible for hemp. The U.S. Food and Drug Administration (FDA) would be responsible for CBD products intended for human and animal consumption.

This is where things get messy. CBD is the primary ingredient in an FDA-approved pharmaceutical product, an anti-convulsant known as Epidiolex. This means that CBD products intended for human or animal consumption must be FDA-approved to be used as an ingredient in products sold on the market. The only type of CBD product that has been given a pass so far is topicals. To further complicate matters, the only regulation issued by the FDA regarding CBD in the years since this change is regarding marketing these products.

The regulatory uncertainty surrounding CBD products makes it risky for bankers to work with CBD brands. Some may be willing due to the legalization of hemp, but many realize the FDA could issue changes at any time, making the segment a big risk for the famously risk-averse finance professionals.

What is the SAFE Banking Act?

The Secure and Fair Enforcement (SAFE) Banking Act is a bill that has circulated through Congress since it was introduced in 2017. This measure intends to ameliorate the issues cannabis businesses face when it comes to securing banking and financial services by codifying the existing FinCEN guidance on banking cannabis businesses into law. While the legislation wouldn’t change much about how cannabis banking works, it could encourage hesitant banks to work with the industry.

The SAFE Banking Act has hit a number of pitfalls. After a slow start, the bill reached its first major milestone when it obtained approval in the House of Representatives by a bipartisan vote of 321 to 103 in 2019. The SAFE Banking Act expired while awaiting a vote in the Senate as the 116th Congress came to a close.

Then, in 2021, the SAFE Banking Act passed the House of Representatives again by a vote of 321 to 101. The bill was to be added to the National Defense Authorization Act (NDAA) 2022, which would effectively force a Senate vote on the measure. However, the SAFE Banking Act was removed from the NDAA at the final moment last December, stalling its progress once more. As of February 2022, the bill has been reintroduced in the House.

Best tips for securing a bank account for your cannabis business

Every aspect of a financial institution’s services can be difficult to come by for cannabis businesses. But not all bankers believe the stigma facing the industry, and many are aware that federal regulations in fact allow the legal banking of state-compliant cannabis businesses.

“The truth is that there are actually roughly 200 banks that [work with the cannabis industry],” Gurien said. “Less than half of them welcome THC licensees, and more than half of them are local credit unions and community banks that often have months-long waitlists to apply for an account.”

The silver lining is that although it may be difficult to find, cannabis-friendly banking and financial services are out there – you just need to know where to look.

• Don’t lie to the bank: Many cannabis entrepreneurs have been ill-advised to hide the true nature of their business in an attempt to get an account faster. Doing so is a costly and illegal mistake. Accounts can be shut down without warning, and your business may be blacklisted from opening other accounts.
• Be prepared to get rejected: Some banks simply don’t want to work with a cannabis business. Being upfront with prospective banks will make the process a lot more efficient; those that aren’t willing to work with the industry will sever ties immediately, while those who are open to it will work closely with you to navigate the unique state of banking and finance in the legal cannabis industry. 
• Leverage your professional network: There are a lot of great cannabis professionals that can help connect you to banks that are already legally banking and supporting cannabis businesses. Leverage your own professional network to find these connections. 
• Prepare your documentation: Even cannabis-friendly banks have to abide by the strict regulations set out in the FinCEN guidance governing highly regulated industries. This means they need to account for every dollar in and every dollar out, so it’s important you offer detailed, transparent documentation into your business’s operations. The easier you make it for a bank to onboard you as a client, the more likely your search for financial services will bear fruit. 
• Stay in touch with your banker: Once you secure banking for your cannabis business, stay in close contact with your banker. Forming a tight-knit relationship is key to ensuring the longevity of your account and availing your organization to additional services.

Cannabis banking done the right way

The cannabis industry has been unfairly forced to deal fully in cash or engage in questionable loopholes to obtain basic bank accounts. Unfortunately, some of these methods have compounded the stigma facing cannabis businesses in the eyes of the very bankers that decide whether to work with the industry. The reality though, is that there already exists a federally legal path for bankers to work with the cannabis industry, and many are stepping up to the plate despite their fellow bankers’ misgivings. As legalization begins to expand and more banks do so in a safe and compliant manner, there is hope that these services will expand in the years to come.